Chinese Manufacturing Strategy: How much is your IP worth to you?

I’ve had several discussions with potential clients that go something like this: “We currently manufacture our product in China and we’d like more control over the hardware design and software source code.” When these firms try to get the design files, they realize that they don’t have full access to what they thought was their own intellectual property.

When manufacturing with a Chinese partner, it is common to have that firm optimize your design or outright design the entire product for you. There are many types of contracts and engagement models related to Asian outsourcing and it is critical to foresee what you may be sacrificing down the road with each option. It is also common to have “misunderstandings” about access to design documents, no matter what the contract says.

There are strong motivations to finding a Chinese manufacturing partner that will help design or cost-reduce your product. These firms are usually supply-chain experts, reducing the cost of your product to highly competitive levels. They can also do design work at a fraction of the cost of US engineers and can have very quick turn-around times. However, there is truth in “you get what you pay for.”

Some of the problems we’ve seen with not owning or having access to your product IP are:

Inability to move production to a different factory, or back to the US (to reduce cost, improve quality, improve lead times, and so on);

Inability to fix problems to your satisfaction in hardware or software;

Difficulty in coming out with a new product that is more complex than current products, because the factory may have engineers with limited experience beyond the current product line;

Problems collecting/assessing IP during a company sale, or pre-sale audit;

Cloned or derived products based on your design; and

General lack of control over your own product.

I enjoyed reading the book “Poorly Made in China”, but I don’t think it is a wholly accurate view of electronics manufacturing in China. The book was mostly focused on very cheap plastics manufacturing. Electronics manufacturing in China has come a long ways in the past 10 years, and has clear benefits for those willing to manage it properly.

One middle-of-the road manufacturing strategy is to give the hardware design responsibility to the overseas manufacturer, but retain all software source code in-house and only send binary code to the manufacturer. This allows the manufacturer to work their magic on the hardware supply chain, but keeps the source code secure, since most features are implemented in software nowadays. Also, it is also common to require approval for all changes to the bill of materials (BOM), at least in theory.

I would guess that most companies manufacturing products in China have experienced some of the problems listed above at some point in time. Since there are real costs associated with bringing the design in-house (or to another US firm), I would also guess that many have decided that it is best to try to manage their existing situation as best as possible. Many other companies reach a state of success where the value of the product line is just too great to not have complete control over the design.

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